Money Q & A
By Ernst & Young
November 2005
Q I’m
a Romanian head of a small (25-people) company. For the first time, we are
wanting to employ a foreigner. Can you advise me on the most tax-efficient
means of doing so. We are prepared to think laterally on this.
W. A., Targu Mures
A Local employment of a foreigner is
an expensive and administratively complex option, particularly due to recent
legal developments.
However, if you plan to use an expatriate’s services for up to one year, you may consider using a secondment arrangement, whereby the individual will be employed in a foreign country and will work in Romania based, for instance, on a supply of personnel agreement with his foreign employer (which could well be a company he controls). The foreign employee’s tax liabilities will mainly be 16 per cent income tax and 6.5 per cent for health fund contribution and will not include other taxes and contributions required in the case of Romanian employees. Also, your company will not be liable for any of his taxes.
If you want to retain the expatriate for a period of more than one year, you may appoint him as an administrator, if the facts and circumstances allow. This position may exempt him from the necessity to obtain a work permit and be locally employed. His employment structure and tax liabilities will be essentially the same as in a secondment.
Q I
manage a group of companies and want to wind one of them up. It has not traded
for years and does not owe any debts to the state. What steps do I need to
take?
Roland Sinclair, Bucharest
A Winding up a company depends on the
legal form and number of shareholders. If a company has more than one shareholder,
the wind-up involves a formal dissolution followed by liquidation. In the
case of a sole shareholder SRL, it requires just dissolution and not the subsequent
liquidation. However, while in the first case, the liquidation will wipe out
the liabilities of the company, in the second case, these liabilities are
fully transferred to the sole shareholder.
In case of liquidation, the shareholder(s) of the company should publish a declaration for the dissolution in the Official Gazette, and appoint liquidators, who will then take the process to conclusion. It also involves deletion from the Trade Registry where the company is incorporated.
Liquidation and dissolution without liquidation are not tax-free operations. Particular care should be taken while considering taxation (mainly, profits tax and dividend or “deemed” dividend tax) for equity, reserves, retained earnings, etc. Usually this involves a tax audit and can be a time-consuming process.
The dissolution-only process (in case of single shareholder) is simpler and a company is considered legally wound-up if there is no objection from creditors within 30 days.
There’s another simple solution. You could transfer the liabilities of the target company to another entity of the group and opt for a merger rather than liquidation. The advantages of merger are (i) it is tax-free; (ii) the process is more predictable (takes 3-5 months); and (iii) the likelihood of a tax audit is much lower in practice than in the case of dissolution/liquidation.
Q My
company is based in the US and is considering establishing a subsidiary in
Romania. Can you tell me the advantages of setting up an SRL as opposed to
an SA?
Name and address withheld
A From the business perspective there
is no major difference. Both SRLs and SAs can carry out the same businesses
with some exceptions. Banks, insurance and financial services companies need
to be SAs.
From the organisational and legal perspective, there are some differences,
particularly:
• an SRL can have one shareholder while an SA needs minimum five;
• the minimum capital requirement for an SRL is lower than an SA (RON 200 versus RON 2500);
• an SRL is normally subject to simpler requirements for its management, for internal and external audit, etc.
SRLs have some limitations compared to SAs such as the inability to issue debentures or make debt-to-equity conversions, or the relatively more complicated procedure for transfer of shares. However, in your case these probably would not outweigh the advantages.
Q Our
company regularly gets asked to make donations to charity, and would like
to, but is there any tax relief for charitable donations in Romania?
C.S., Bucharest
A Yes, there is tax relief for such donations if these donations qualify as sponsorship expenses under the law. While sponsorship expense is not tax deductible for the sponsoring company, the sponsored amount can be adjusted against profits tax if:
(i) the amount is within 0.3 per cent of turnover; and
(ii) does not exceed 20 per cent of profits tax due.
The excess amount is neither tax deductible nor adjustable against profits tax. A charitable donation is considered sponsorship if it is made towards a non-profit or similar organisation whose activities are cultural, artistic, educational, fundamental and applied scientific research, humanitarian, philanthropic, sports, human rights protection, medical, social assistance, environmentalist, representation of professional associations, as well as restoration and conservation of historical monuments. Such donations can also qualify for individuals.
To avail tax benefits for a charity donation, you should conclude a sponsorship contract with the beneficiary. Charity donations to individuals may need to be notarised.
These responses do not in any way constitute professional advice and Ernst & Young Romania will not be held liable for any action taken on the basis of these answers. As Romania’s fiscal legislation undergoes frequent change, readers are advised to contact Laura Damian, Manager, on Tel: 402.4000 or email laura.damian@ro.ey.com to find out more about the services Ernst & Young can provide.
(Please mail your tax and business related queries to Andrew Begg at andrew@vivid.ro)
